Corporate Raiders! Barbarians at the Gate! Activist Investors! Today’s activist headlines are definitely not the same as the likes from 20 years ago. Yes, Carl Icahn and Nelson Peltz are two of the most recognized names when the topic of corporate raiders comes up, but the eye-catching ones today show the evolution of activism in the investing world. Today, the eye-catchers are the Big Boys—Vanguard, Blackrock, State Street and the like. What shook the boardrooms this week was the victory by a tiny climate-driven activist hedge fund that won two seats on the board of Exxon Mobil. Is this the death knell for the energy sector? Should investors dump all their oil and gas stocks tomorrow? More broadly, what does this mean for investors and ACM portfolios?
Spoiler alert: don’t dump your energy shares. It’s not the end of the world. We’ve been on a long and winding road to get to where we are. Tactics, goals and the players involved have changed over the years. Icahn and Peltz made names for themselves targeting specific companies with specific objectives. Icahn’s raider credentials were firmly established with his takeover and dismantling of Trans World Airlines in the 1980s. Peltz is well known for targeting Heinz, Kraft Foods, Wendy’s and DuPont to name a few. These raiders had focused, relatively short-term goals in mind. Sell off a division or brand, restructure the company, usually goals that could be attained within a year or two. The players in this week’s events are much bigger and their time horizons are much longer.
The players today incorporate the largest owners across not just the energy sector, but the entire market. When looking at the S&P 500 Energy Sector Index, Vanguard, Blackrock and State Street (the three dominant index fund and ETF providers) account for top 5 ownership of every constituent, with total ownership between 20% and 27% of each company. Blackrock and Vanguard have been prodding ExxonMobil for years to at least begin to address climate concerns. The new entrant gained traction with large pension funds which they levered to gain support of the index funds. Leverage and support from the index providers has permanently altered the activist game. Similarly, the time horizon has shifted to the long term. To quote Vanguard’s Investment Stewardship Officer from their 2019 Commentary:
We also seek to reframe the conversation about sustainable investing. When a Vanguard fund—particularly an index fund—invests in a company, we expect that the fund may hold shares of that company conceivably forever. The way a board governs a company— including its oversight of material environmental and social risks—should be aligned to create sustainable value long into the future.
This is in stark contrast to traditional raiders who were often viewed as looking to make a quick buck.
The rise of Big Activism in the US is behind the curve when compared to many foreign markets. Japan introduced the prestigious JPX-Nikkei400 index in 2014 which has led to much improved corporate performance and laid the groundwork for the introduction of ESG-specific indexes in 2018. ESG—Environment, Social, Governance—investing has taken a front-row seat in Europe. When we meet with European company management, not a meeting goes by without a discussion of the firm’s strategy and progress on its ESG initiatives. In fact, there are several annual investor conferences dedicated to ESG investing. Sustainability in investing and corporate behavior has become a critical focus and all stakeholders, whether they be management, investors, employees or neighbors, have become involved.
Although there are mounting pressures from the current administration to require companies to provide more detail on environmental risks and greenhouse-gas emissions, the evidence shows that US market participants are moving ahead of regulation. Traditionally passive investors have become active in voting their shares. Barron’s website recently had a lengthy article touting a discussion from its “ESG Roundtable Pros.” A quick scan of Wall Street Journal headlines shows three articles on ESG topics last month alone. The market is clearly taking strides to the future, regardless of mandates from regulators.
So to answer the question Are Activist Investors an Opportunity or a Threat?, the answer is Yes. The new reality is that they are a force for change. Our strategies at ACM recognize that change and we will continue to adjust your portfolio to take advantage the new environment.